This document sets out Revera Asset Management Limited’s (“Revera” or “the Company”) approach to achieving best execution when trading on behalf of its clients. It is effective from 3 January 2018.
What is best execution?
Article 65 of the MiFID Org Regulation (the duty of investment firms carrying out portfolio management and reception and transmission of orders to act in the best interests of the client), states that investment firms must take all sufficient steps to obtain, when placing orders with other entities for execution that result from decisions by Revera, the best possible result for their clients. In order to do this, Revera must consider the following factors:
- Likelihood of execution
- Likelihood of settlement
- Size of order
- Nature of the order
- Any other consideration relevant to the execution of the order.
The importance of these execution factors is considered in Appendix 1.
Best execution process within Revera
i. Integration between the investment decision-making process and best execution
Revera’s clients benefit from a “layered” series of actions, which aim to ensure that, at every part of the investment decision-making process, their interests are considered. This can be summarised by the following diagram;
Revera’s investment decision-making process incorporates a review of each execution factor inherent in dealing in a security, to give a tailored perspective on what is likely to constitute best execution. This process involves considering a security’s liquidity, and whether a particular broker is more likely than any other to deliver the best overall outcome for clients.
The best execution element of the investment decision-making process is performed in two stages. Firstly, each execution factor is colour coded in red, green or amber, to highlight whether it is very important, not important or somewhat important, in achieving the best outcome for clients. This colour coding exercise will also assist any subsequent “dealer” in highlighting where the priority should lie when selecting a broker. The second stage of the process is the selection of a “default broker” for trades at the point of the investment decision. This is the broker which, in the opinion of the investment analyst, is likely to have the best market knowledge of where to source or place stock for a given security. This selection may be by virtue of long-standing relationships with sector participants, or because of the corporate relationship between the company whose securities are being traded and the broker.
ii. Explicit external costs
When considering the execution factors that are likely to be important in achieving the best outcome for clients, there are situations where there is no a priori reason to believe that one broker will necessarily deliver a better outcome than any other broker. Therefore, explicit external costs (i.e. broker commissions) are likely to be the main execution factor. Revera believes that these situations are more likely to exist in the securities of the UK market’s largest 50 companies (by market value) and accordingly, Revera regularly (and typically annually) asks its cohort of approved brokers to submit their lowest dealing commission rate, that they would be willing to deal at, in these securities. The broker who submits the lowest bid will be the default broker for all such deals.
Where a security is being traded, that is not one of the UK market’s largest 50 companies, brokers are again asked to submit the most competitive execution rate they will apply to two categories of trades. “Standard Trades” are purchases and sales in companies that sit within the FTSE350 Index, but are not one of the market’s largest 50 companies by market value. “Illiquid Trades” are purchases and sales in all other UK listed or AIM-quoted equities. The rates quoted by each broker vary.
The extent to which the proposed execution rates affects the choice of broker depends on the relative importance of costs in the execution factors. Trades where cost is a relatively important execution factor will be directed to lower cost brokers. Broker selection for illiquid trades is likely to be relatively independent of cost.
If there are situations where Revera’s dealers believe that there may be a better outcome for the client if a different broker is used than the default broker, this decision must be made with reference to the relevant execution factors and documented accordingly.
iii. Implicit internal/external costs
As Revera’s fund managers are also its dealers, the Company regards the prospects for implicit internal costs to be de minimis. Revera time stamps share prices at the point an order is given to a broker, and this information is used when comparing prices achieved versus benchmark prices, which in turn informs the assessment of implicit external costs.
iv. Brokers’ duty of care
Broking counterparties are obligated to provide its clients with a duty of care to achieve best execution. Since Revera is a professional client of its broking counterparties, it places reliance on its brokers to select the execution venues most likely to deliver the best outcomes for its clients. In the case of illiquid investments, brokers should make appropriate efforts to match Revera’s order to a corresponding buyer or seller elsewhere. As per FCA guidance, Revera does not, in establishing its best execution framework, seek to duplicate the steps taken by the brokers it uses to execute its orders (COBS 11.2A.35).
Specific Instructions from clients
Whenever there is a specific instruction received from a client, Revera must execute the order following the specific instruction. In these situations, Revera would satisfy its obligation under this section to take all reasonable steps to obtain the best possible result for a client to the extent that it executes an order, or a specific aspect of an order, following a specific instruction from the client in relation to the order or the specific aspect of the order.
Revera is obliged to summarise and make public on an annual basis, for each class of financial instrument, the top five execution venues used in the preceding year and information on the quality of execution obtained. The top five execution venues will be assessed in terms of trading volumes.
Revera is also required to publish certain information, including the percentage of client orders executed on the execution venue in question. Such information needs to be broken down into passive (order that provided liquidity), aggressive (order that took liquidity) or directed (by the client) orders.
Revera is required to monitor the effectiveness of its order execution arrangements and execution policy to identify and, where appropriate, correct any deficiencies. This will involve assessing, on a regular basis, whether the execution venues included in the best execution policy provide the best possible result for the client or whether a change to the Company’s execution arrangements is required.
i. Investment Governance Committee
Revera has a formal Investment Governance Committee, which reviews the dealing, commission and execution data from the best execution process, and is used to challenge the fund managers on dealing methods used, and reports to Revera’s Board of Directors (‘the Board’) with recommendations for improvement if so required.
ii. Compliance Monitoring Programme
In addition to the creation of the Investment Governance Committee, best execution is tested monthly as part of the Compliance Monitoring Programme, which is also reviewed by the Board. As with all Revera’s compliance testing, 100% of the orders placed and deals transacted will be tested.
In addition to the testing undertaken, a review of the best execution policy will be performed annually and updated accordingly. Any material relevant regulatory change which affects Revera will also require a review of the best execution policy.
All employees involved in Revera’s best execution process receive relevant training every two years. The training needs of each employee will be assessed at the start of each year as part of the annual appraisal process.
Appendix 1 – Importance of Execution Factors
Price is likely to be the most important factor when the “true” price of an investment is uncertain. This is likely to be more relevant to relatively illiquid investments, where a wide spread between the quoted bid and offer prices makes it unclear at what price business should be transacted. Price is also likely to be the key factor in an investment whose price is volatile over short periods of time. Where price is one of the most important execution factors, the dealer may place a “limit” beyond which a broker may not transact for that particular order.
Revera does not consider its clients to be exposed to implicit internal costs given the singularity between its fund managers and dealers. Implicit external costs are monitored, but cannot be known ex ante. Since Revera uses brokers to transact its client orders, the only explicit cost Revera’s clients bear is the broker commission on the trade. In most instances, the cost of a trade is not likely to be the most important execution factor; the tiny change in outcome for the client of reducing commissions by say, 20%, would be wholly negated by a 0.05% adverse move in the price achieved, or by failing to transact in the volume of shares required.
However, Revera believes that, within the investment size that it currently deals in, there is essentially a “perfect” market in the shares of the UK market’s largest 50 companies, by market value. Revera believes that it can deal when it chooses, in the size it needs in these companies, and no particular broker is likely to be able to achieve a better price than any other. In these instances, cost is likely to be the most important execution factor.
As a long-term fundamental investor, Revera’s dealing activity is rarely driven by the need to deal quickly. However, it recognises that there are certain types of equity investment whose share prices are sensitive to changes in macroeconomic events, and there may be times when the speed of the transaction is the most important execution factor.
Likelihood of execution
At the bottom end of the UK market capitalisation spectrum, there is no effective electronic market to transact shares. Market makers and other participants will “indicate” prices for purchase or sale, but these will typically be in such small volumes as to be irrelevant when looking to make meaningful purchases or sales. Investments at this level essentially constitute “matched bargain” business. An order to buy a certain amount of a security at a certain price is only likely to take place if the broker can find a corresponding seller on the same terms. In this instance, it is highly uncertain if the proposed trade can take place, and the likelihood of execution is likely to be more important that other factors.
Likelihood of settlement
Revera invests in fully listed or Aim-quoted securities, and listed UK Government debt securities. It does not invest in CFDs, OTC contracts, or unlisted securities. The risk of a settlement default is very low, and in terms of execution factors is always likely to be the least important execution factor.
Again, when considering investments with lower liquidity, size may become the most important factor in dealing when there is a risk that clients may be left with uneconomic quantities of a certain security in their portfolios. Size is likely to be closely linked to likelihood of execution in terms of its importance.